Do you ever worry about how your beneficiaries will manage their portion of their inheritance when you pass away? One solution that allows you to still exert some control over your money–even after passing–is with a revocable living trust (RLT).
Establishing the Living Trust
The trust is established by a written agreement or declaration that appoints a trustee to manage and administer the property of the grantor. As long as you're a competent adult, you can establish an RLT. As the grantor, or creator of the trust, you can name any competent adult as your trustee; some people prefer to choose a bank or a trust company to fill this role. You the grantor can also act as trustee throughout your lifetime.
Once it's set up, you begin by placing your assets—including investments, bank accounts, and real estate—into the trust. At this point you no longer own those assets; they belong to the trust. And because your assets belong to the trust, they do not have to go through the probate process upon your death. (In essence, the trust is like a rule book for how your assets are to be handled when you die.)
However, as this is a revocable living trust, you retain control of the assets, even though they no longer belong to you, while you're alive. You can amend or change the trust at any time. Income earned by the trust's assets goes to you and is taxable; but the assets themselves do not transfer from the trust to your beneficiaries until your demise.
Advantages of the Living Trust
Avoiding probate is the main advantage of establishing a living trust, but other benefits like privacy protection and flexibility make it a smart choice.
Avoidance of Probate: Probate is the legal process for transferring your property when you die. It requires presenting documents to a probate court and going through a multi-step process – or processes if you have assets or property in different states. Establishing an RLT avoids expensive probate proceedings, allowing assets to be transmitted to beneficiaries faster. Assets named in trust bypass the costly courts and typically take precedence over the property designated in your will.
Changeable and Flexible: The living trust allows you to make changes (or amendments) to the trust document while you are still alive, at your own discretion.
Privacy Preservation: Revocable trusts are a good choice for those concerned with keeping records and information about assets private after your death. The probate process that wills are subjected to can make your estate an open book since documents entered into it become public record, available for anyone to access.
Eliminate Challenges to the Estate: The standard will may create family disputes at your death and be challenged for alteration by any member of your family. By using a trust, you can specifically disinherit anyone who posts a challenge to your wishes upon your death.
Segregation of Assets: This is useful for married couples with substantial separate property that was acquired prior to the marriage. The trust can help segregate those assets from their community property assets.
Assignment of Durable Power of Attorney/Guardianship: A living trust can be used to help control a guardian's spending habits for the benefit of your minor children. It can also authorize another person to act on your behalf if you become incapacitated and need someone to make decisions for you. Should you become impaired or disabled, the trust can automatically appoint your trustee to oversee it and your financial affairs with no requirement to obtain durable power of attorney.
Continuous Management: This allows the wealth that you've accumulated to continue to grow for multiple generations by using a professional trustee to manage your property. You can limit the number of withdrawals to income only, with special emergency provisions if you wish.
Estate Tax Minimization: While the RLT is not a good tax minimization tool on its own, provisions can be included in the trust documentation to transfer wealth by establishing a credit shelter trust in the event of your death. The CST is a very effective tool to help reduce estate taxes for large estates that exceed the combined estate tax exclusion amounts.
Disadvantages of the Living Trust
While there are many advantages to establishing a revocable living trust, there also some drawbacks:
Expense of Planning: Establishing a trust requires serious legal help, which is not cheap. A typical living trust can cost $2,000 or more, while a basic last will and testament can be drawn up for about $150 or so.
Maintaining Trust Books and Records: And once you create the trust, your work isn’t done. Most people need to monitor it on an annual basis and make adjustments as needed (trusts do not adapt automatically to changed circumstances, such as divorce or the birth of a child). You should consider the added inconvenience of making sure that future assets are continuously registered to the trust and providing other professionals with access to the trust documents to review trustee powers and duties.
Re-titling of Property: Once the trust is established, property must be re-titled in the name of the trust. This requires additional time, and sometimes fees apply to processing title changes.
Minimal Asset Protection: Contrary to popular belief, revocable living trusts offer very little asset protection if you retain an ownership interest, such as naming yourself as trustee.
Administrative Expenses: Expect to contend with additional professional fees such as investment advisory and trustee fees if you appoint a bank or trust company as the trustee.
No Tax Break: For all your hard work, you will not receive a tax benefit from a revocable trust. Your assets in the trust will continue to incur taxes on their gains or income and be subject to creditors and legal action.
Unpredicted Problems: Hassles such as problems with title insurance, Subchapter S stock and real estate in other countries can create a whole host of new issues. More problems can crop up if you fail to adequately educate your spouse on the terms and purpose of the trust.
The Bottom Line
Compared to wills, revocable trusts provide increased privacy as well as more control and flexibility over asset distribution. With a revocable living trust, you do most of the work up front, making the disposition of your estate easier and faster. But they also require substantially more effort and higher costs. As with any major legal issue, you should consult with a trusted professional, in this case, someone well versed in estate planning, before embarking on a project of this magnitude.